Unfair Contracts May Be Unenforceable

Published in Orchard and Vine Magazine on: December 4, 2014

As the end of the year approaches, some of those contracts that are an important part of your business operations may be coming up for renewal. Rather than simply agree to the same terms or sign a document placed before you, read the agreement;. If you don’t understand some of it, read it again; and if you still don’t understand the agreement or the purpose of a contractual term, ask your lawyer for help.

Generally, a contract that is freely made should be enforced, including those terms that result in one side having a legal advantage over another. However, contract terms that are grossly one-sided or very harsh are the exception to this rule; contracts that are unfair or contain unfair terms will not be enforced.

The basic principle which governs contracts is that a person’s word is their bond and, as such, parties to a contract should be free to choose how to structure their contract. Generally, courts will not protect a person from irresponsibly made or reckless agreements. But protection from unfair contracts or contractual terms may occur in exceptional circumstances because of the significant harm that may arise from such unfairness. This harm may take the form of a large economic loss to one party, an increase in litigation, result in moral disapproval or result from an abuse of power.

Let’s discuss two examples which we can take from prior cases heard before courts. The first deals with inequality in bargaining power. In an older English Court of Appeal case (which impacts our legal principles), an elderly farmer (and loving father) agreed to guarantee the debts of his son’s business, and as such, mortgaged his property so his son could obtain a loan. The farmer’s son defaulted on the loan and the bank took action to foreclose on the farmer’s only asset, his farm. The farmer challenged the bank and raised many defences. The Court of Appeal set aside the mortgage. One judge based his decision on the inequality of bargaining power between the parties. It was noted that where a party, without independent advice, enters into a very unfair contract or gives property for grossly inadequate consideration, possesses little bargaining power due to his or her own needs, ignorance or infirmity and experiences undue influence or pressures for the benefit of another person, judicial relief may be required.

The second example deals with burdensome terms found in standard form contracts. These terms must be drawn to the attention of the contracting party who did not prepare the contract. The party who presents the contract cannot simply rely on the other party’s signature, but must draw this term to signing party’s attention before he or she signs the contract. This requirement can be met by typing these terms in capital letters, a larger font or different color. One great example of this concept has to do with car rentals and insurance exclusions for alcohol consumption. In an Ontario Court of Appeal case, a driver rented a car and purchased collision insurance. The driver signed a standard form agreement which included a term which denied insurance coverage to any driver who consumed liquor in whatever quantity. The driver was in a car accident and had consumed alcohol (albeit not to the point of intoxication) before the accident. The rental car agency denied insurance coverage. After trial on this issue, the court did not allow the rental car agency to enforce this contractual term as the clause had not been specifically drawn to the driver’s attention before the contract was signed. Along the same lines, a contract may be found to be unenforceable if a party does not have the entire contract when it is signed.

Now is a great time to review your existing contracts. If you will be negotiating a contract, take the time to review all its terms. Seek legal assistance to help you through this process. Your lawyer will be able to assist you in identifying any potentially problematic agreements or terms. If you would to learn more about unfair contract terms, see your lawyer or review the reports of the British Columbia Law Institute on this topic available on its website.